SOUTH KOREA. On a revenue basis, 2016 has been a banner year for The Shilla Duty Free, highlighted by a +36% increase in sales for the first nine-months at its flagship downtown store in Seoul. But like all its peers, Shilla faces a market of regulatory and political uncertainty, proliferating competition, and escalating costs both of airport rents and tour agency commissions.

In Seoul last week, Martin Moodie spoke to a senior spokesman about market conditions. The following Q&A interview forms part of a wider feature on Shilla that will appear in an extensive Korean market report in the next issue of The Moodie Davitt Report Print Edition.

The Moodie Davitt Report: Shilla had a very strong first nine months in Korean duty free, in sales at least. How would you sum up the year to date?

South Korean duty free is a very dynamic industry and 2016 has been the most dynamic period ever for it. Multiple new players made their entry and the industry’s entire geography, including the competitive environment, has been fluctuating rapidly.

The Shilla Duty Free, as one of the traditional leading operators, has been endeavouring to differentiate itself from the new players and to adapt to the shifting shape of the industry. Our performance is a result of such labours.

Within that context what do you see as the major challenges and opportunities?

The new entrants in the industry and the evolution of the South Korea-China relationship are the most crucial challenges.

The Shilla Duty Free should be able to differentiate itself successfully from the new entrants and appeal to customers – increasing the share of a limited pie will be a decisive success factor. The new entrants will try their best to draw people’s attention and, as a traditional powerhouse, The Shilla Duty Free must be ready for their challenge.

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The Shilla Hotel in Seoul has got the green light for a major redevelopment. A new duty free shop will become part of the operation but unfortunately for Shilla, whose current shop desperately needs more capacity, that will take some years.

In addition, the relationship over the Yellow Sea [subject of a tense territorial dispute between South Korea and China -Ed] could have a great effect on the size of the entire pie for our duty free industry and also affect overall industry growth. The importance of the [political] relationship cannot be over-emphasised. We need to monitor it and respond constantly to ensure business stability.

On the other hand, the changing demographics and behaviour of Chinese customers create a good opportunity for The Shilla Duty Free. Chinese customers are getting younger and that shift affects their behaviour.

Young Chinese are utilising mobile devices throughout their decision-making process and purchasing behaviour. This trend opens a new channel for The Shilla Duty Free to communicate with customers and generate sales.

Furthermore, the young travellers’ great appreciation of South Korean culture and the real ‘South Korean life’ is totally new to the industry and creates the chance for a brand-new business model for The Shilla Duty Free.

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Mobile phones and shopping lists in hand, Chinese shoppers peruse products and prices

mobile-phoneskiehlsLet’s examine the major brand and category trends that you identify.

The growth of South Korean local brands in the beauty and fashion categories is extraordinary.

Imported brands are the traditional powerhouses in beauty and fashion and have historically accounted for the major portion of gross sales. The share of South Korean brands, however, is increasing swiftly at The Shilla Duty Free, largely thanks to the recent ‘K-wave’ phenomenon in Asia, including Mainland China.

Increasing demand of Asia Pacific travellers for South Korean beauty and fashion brands lends increasing weight to those local brands in duty free. Those items and brands that have appeared in South Korean TV shows get even more attention and are showing explosive increases in demand in our duty free stores.

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(Above and below) Korean skincare products are generating extraordinary business with Chinese consumers in duty free

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Anything new or different in the pipeline?

The Shilla Online Duty Free recently introduced a range of pet supply items.

Customers’ expectations of a duty free store are becoming more and more diverse and personalised in line with similar changes in their lifestyles. The introduction of pet supplies is part of our way of tackling such diverse customer needs.

Introducing and developing new categories and brands will allow The Shilla Duty Free to be a more attractive shopping channel to customers with various needs. It will also revitalise The Shilla Duty Free brand even more.

In addition, South Korean on-line duty free is becoming a ‘petri dish’ [breeding ground] for young, affordable cosmetics brands to find out if they are going to be successful among young Chinese customers before they go off-line.

Such a trend is more and more popular among such rising brands. If you want to identify the future stars of Asia Pacific’s cosmetics industry, you should be looking at the new brands launched via South Korean on-line duty free.

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Sales at The Shilla Duty Free’s flagship store rose +35.6% in the first nine months, buoyed by surging Chinese visitors

The resurgence in Chinese visitor numbers to Korea this year is highly encouraging after the MERS crisis in 2015. What efforts is Shilla making to attract more Chinese tourists?

The Shilla Duty Free held the Samsung Tourism Brands Exhibition in Shanghai in September 2015 after the tragic MERS episode in South Korea.

The company has promoted tourism in South Korea and offered various benefits to Chinese media and KOLs (on-line Key Opinion Leaders) in Mainland China to lure back Chinese travellers to South Korea as their holiday destination of choice.

We are also constantly releasing both on-line and off-line content in Mainland China regarding tourism in South Korea as well as the benefits that The Shilla Duty Free can offer.

Chinese travellers under the age of 40 now dominate spending in your shops and those of your rivals. How is Shilla adapting to this evolving demographic?

It is safe to say that the Chinese younger generations have the greatest compatibility with the mobile environment and mobile devices on the globe. The Shilla Duty Free provides a full-scale mobile duty free shopping experience to enhance young Chinese customer’s experience at The Shilla Duty Free.

How do you achieve that?

The basic measures include built-in Wi-Fi access in the stores, our official website and an on-line duty free store provided on The Shilla Duty Free App.

However, The Shilla Duty Free goes a few steps further. With the app, Chinese mobile users can receive updates concerning promotions and campaigns through a push notification.

The app also supports off-line purchases through QR codes in the Seoul flagship store and the pick-up desk queueing service at Incheon International Airport. The app even provides a voice recognition search function. The Shilla Duty Free will be adding more functions to this app to create an even better mobile duty free shopping experience in the near future.

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The Shilla Duty Free app allows customers to scan QR codes and obtain product and pricing information

Apart from the app, The Shilla Duty Free also supports duty free shopping via mobile devices even in our off-line stores. Young Chinese are very familiar with mobile payment measures such as Alipay and Wechat pay. These payment measures, famous across Mainland China, are fully acceptable in any off-line store we operate.

Younger generations can make payment just as they do in their home country and it makes The Shilla Duty Free a more convenient and attractive shopping place for them.

It’s interesting that The Shilla Duty Free and other Korean retailers have been more successful in reaching out to the millennials than rivals worldwide. Why do you think that is?

There are many reasons. The biggest might be the young and trendy South Koreans brands The Shilla Duty Free offers to this particular generation. This young generation prefers South Korean beauty and fashion brands as South Korean culture is perceived as ‘hot’ by young Chinese.

Furthermore, The Shilla Duty Free constantly looks for newly rising brands and introduces them to duty free faster than operators in other countries.

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Edgy Korean eyewear brand Gentle Monster is taking the market by storm

gentlemonster-2The Chinese authorities are cutting back on cheap group tours to Korea, due allegedly to the exploitation of Chinese tourists. Is this a serious concern?

The Shilla Duty Free agrees that Chinese travellers deserve a better quality experience in South Korea.

The Chinese government is trying to improve their people’s travel experience in South Korea and it totally makes sense. There might be a temporary influence on South Korean duty free but the industry here is not paranoid.

The Shilla Duty Free expects less of an impact as we have constantly been acquiring loyal customers who make repeat visits. In addition, the shift of Chinese travellers from group to FIT also eases certain concerns around the total number of Chinese group tourists.

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(Above and below) Chinese group tourists arrive at The Shilla Duty Free for some intensive shopping. Shilla is working hard to increase the share of FIT clients within its overall mix.

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Staying with Chinese sensitivities, how much of a concern is the THAAD missile system dispute?

External political matters have a certain effect on the industry – that cannot be denied. The effect of such issues however on the duty free sector is quite limited and not as severe as the media portrays. Cooperation between South Korea and China in both the public and economic sectors has been growing beyond any temporary issues.

The actual effect caused by the aftermath [of this dispute] feels less severe among Chinese travellers in the actual stores, that’s for sure.

Even so, aren’t Korean tourism and duty free simply too reliant on the Chinese?

It’s true that Chinese travellers represent the majority of demand for South Korea’s duty free and tourism industries. However, they are one of the most important consumer groups in global tourism – not just in South Korea.

So it would be more appropriate to describe the increasing importance of Chinese travellers as a global phenomenon, which South Korea shares in. The duty free and tourism sectors here are also putting efforts into attracting other nationalities.

Let’s talk about the profitability pressures in Korean downtown duty free, largely driven by rising tour commission rates that have in turn been prompted by increased retail competition. How big a problem is this?

It would be more correct to say that an overall increase in marketing budgets is causing lower profitability, rather than solely blaming commission rates.

It’s not uncommon for the entry of new players to an industry to cause certain damage in terms of the profitability of existing players. The South Korean duty free industry is going through the same problem.

The Shilla Duty Free has been building constructive and mutually helpful relationship with travel agencies in South Korea, Japan and China. There is always turbulence as the environment changes; however we believe that relationships based on mutual trust will have a beneficial effect on the industry.

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(Above and below) The Shilla Duty Free’s extensive operation at Incheon International Airport has been under intense profitability pressure due to the high rental demands. Nonetheless the retailer is a sure bidder in the forthcoming duty free tender for Terminal 2.

shilla-liquor shillaCan you update us on your international aspirations?

As you know, The Shilla Duty Free is planning to open a new downtown duty free store in Phuket, Thailand within 2016.

The new store will be operated in a JV with local Thailand partners. It will represent another landmark for the island, offering a full-scale duty free shopping experience, including luxury goods, beauty and fashion names and Thailand brands.

The Phuket store is designed to ensure a pleasant and memorable duty free shopping experience for visitors. The store is located in a highly accessible area in a popular tourism spot and the building will enhance the overall customer experience through shopping, dining and leisure. The Shilla Duty Free Phuket store will offer an unparalleled duty free shopping experience.

The situation at the Singapore Changi and Macau airport stores are improving quite quickly and are expected to achieve even better results in the near future. The Changi Airport store recently celebrated the one-year year anniversary of its T3 Duplex Beauty Loft, which provides exclusive services to international travellers.

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The Shilla Duty Free operates in a joint venture with Sky Connection at Macau International Airport, where the Korean retailer says business is improving

The Shilla spokesperson Lee Kwang-soo [actor and entertainer -Ed], who is very powerful across Asia, including Southeast Asia and Mainland China, participated in the celebration event (pictured below), which created great interest among media and social media.

In addition, The Shilla Duty Free Singapore is planning to open another breathtaking walk-through duty free store at Changi Airport T4, scheduled for July 2017, to provide an even better duty free shopping experience.

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‘The Prince of Asia’: The Shilla spokesperson Lee Kwang-soo , star of TV drama Running Man is one of Korea’s hottest celebrities

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How would you sum up Shilla’s global ambitions generally?

It is essential to achieve economies of scale in order to develop and maintain a successful business in the global travel retail industry.

The Shilla Duty Free understands the importance of geographical expansion in achieving further growth in the future even though we are already running a successful business in South Korea. Based on that understanding, we will be endeavouring to expand our business to more regions and countries.

The competition in the industry will get more and more fierce and the trading environment will fluctuate even more. The Shilla Duty Free however, will remain successful in the future. We have proved ourselves for the last 30 years and have accumulated countless know-how and competitiveness. Such strength cannot be easily mimicked by new players in the industry.

Moreover, The Shilla Duty Free is constantly focusing on the younger generation and communicating with them to transform them into loyal customers. As a result, we expect to thrive, based on a combination of accumulated past competitiveness and investment in future competitiveness.